It seems that the government is not happy with the way the Reserve Bank of India governor Urjit Patel is conducting himself. The government expected him to aid in the effort to accelerate growth through measures such as lowering of interest rates and other revival measures, but he has not obliged. Beyond a 25-basis point reduction soon after he took charge last September, Patel has held rates. Unlike his predecessors, Patel is not solely responsible for deciding interest rates; that responsibility now rests with the Monetary Policy Committee, headed by the RBI governor. It has two other RBI representatives, and three government nominees.
Nevertheless, an influential section within the government believes the RBI has been unsympathetic to its concern over persisting high interest rates and reluctant to take advantage of the room afforded by a comfortable fiscal situation and inflation, which is within the central bank's comfort zone of 2-6%.
The government has not concealed its disappointment over the functioning of the MPC, including that of its own three nominees. A certain frustration has set in over the RBI's stonewalling of attempts of ministries such as power and transport to revive stalled projects through a package of measures. “It is not even willing to listen to the concerns of government departments,” said a senior official at the Centre, reflecting deepening disappointment over RBI's “inflexibility.” Similarly, the banking regulator is seen to be moving slowly on tackling the mountain of non-performing assets (NPAs). Even banks have been critical of the manner in which the RBI has dealt with their concerns - and some top bankers are learnt to have conveyed their grievance to the finance ministry.
This, in part, prompted the ordinance allowing the government to “authorise” RBI to issue instructions to banks to resolve specific NPAs by initiating insolvency proceedings. In addition, the RBI was empowered to set up committees to advise banks on stressed asset resolution. Even this has not yet borne results. “A month after the ordinance was promulgated, case specific decisions have not been taken,” said a senior government official.
Red flags within the government first went up the manner in which the RBI handled the Election Commission's request for higher cash withdrawal limit for candidates contesting assembly elections in Uttar Pradesh and four other states. The poll watchdog, a constitutional authority, had wanted the limit to be enhanced from Rs 24,000 to Rs 200,000 when demonetisation-driven limits were in place. The RBI said no, prompting a strong letter from EC to the governor.
The reluctance of the bank to deal with “real-life” situations has since manifested itself in diverse ways, complicating matters for a government that is eager to accelerate growth, according to officials in the capital.
On the issue of interest rates, independent economists such as SBI's Saumya Kanti Ghosh and Bank of America Merrill Lynch's Indranil Sengupta have suggested that inflation will be lower than projected, while Crisil's DK Joshi has backed a rate cut. Ironically, Patel is coming across as more hawkish than his predecessor, Raghuram Rajan.
